The December jobs report was a tad disappointing versus expectations, but solid enough to keep the Fed firmly in pause mode, but a couple details in the report will nag at them. Job gains totaled 145,000 in December versus 160,000 expected and while that gain pales in comparison to the 256,000 print in November, that number was artificially boosted by the return of 50,000 striking GM workers. The full-year figure of 2.09 million is about 200,000 above what economists were expecting a year ago, but it’s also the lowest gain since 2011 and down from 2018’s more-robust 2.68 million. For this year, economists expect monthly job gains to settle in the mid-100,000 level which will be sufficient to offset population growth while being modest enough to give the Fed space to remain patient with rates. Meanwhile, wage growth was somewhat disappointing with a monthly gain of 0.1% which missed the 0.3% expectation as did the YoY number of 2.9% versus 3.1% expected. The YoY print is the lowest since July 2018. Finally, the unemployment rate remained at the cycle low of 3.5%. In summary, the decent job growth, modest wage gains, and stable unemployment rates will keep the Fed in pause mode well into the first half of 2020, but the stuttering wage gains and a below-trend gain in service-providing jobs will merit ongoing attention. More on that below.
- For the month, 145,000 jobs were created versus an expected increase of 160,000. The December number represents a material decrease from November’s 256,000 print (which was revised lower from 266,000 initially reported). In addition, November was artificially inflated by the return of 50,000 GM strikers. For the full-year, 2.09 jobs were added which is about 200,000 above what economists were expecting a year ago, but it’s also the lowest gain since 2011 and 590,000 below 2018’s robust 2.68 million. For this year, economists expect monthly job gains to settle in the mid-100,000 level which is enough to offset population and the moderation will give the Fed space to remain patient with rates well into 2020.
- Average hourly earnings disappointed with a 0.1% gain which missed the 0.3% forecast but November’s initially reported 0.2% gain was revised up to 0.3%. Year-over-year earnings disappointed as well dipping to 2.9% versus 3.1% expected. That’s the lowest YoY reading since a 2.8% print in July 2018. As we’ve seen in recent months, YoY wage gains are stuck around the 3.0% level versus moving materially higher as was the case early in 2019. February 2019’s gain of 3.4% YoY remains the high for this cycle but that pales in comparison to the 4.0+% gains in expansions past. That means demand-pull inflation is likely to remain muted and that will also keep the Fed firmly in pause mode until that YoY rate moves materially higher.
- The unemployment rate remained at 3.5% for a second straight month (actually 3.496% vs. 3.535% in November). The Household Survey—which is used to generate the various employment ratios— saw 58,000 persons drop off the rolls of the unemployed (5.753 million versus 5.811million) while 209,000 persons were added to the labor force denominator (164,556 million vs. 164,347 million). After dropping somewhat methodically during the first half of 2019, the rate seems to be settling around the 3.5% level which it first hit back in September. While the rate may be near bottoming for this cycle, the stability in the unemployment rate is an indicator of labor market strength.
- The broader underemployment rate (unemployed plus part-timers seeking full-time work, plus the marginally attached) dipped to a new cycle low of 6.7% which is also a new all-time low since the series began in 1994. As mentioned, unemployed persons decreased by 58,000 while part-time workers decreased by a substantial 140,000. Both of those contributed to the 2/10ths drop in the underemployment ratio.
- The labor force participation rate (labor force divided by civilian population) remained at 63.2% (63.247% vs. 63.206%) for a second straight month. The stability was driven by the aforementioned 209,000 person increase in the labor force numerator while the civilian population denominator rose by a slightly smaller 161,000 persons. While the current rate remains near the 63.3% cycle high from November, it pales in comparison to the 66% level that prevailed pre-crisis. The 62.7% to 63.3% range over the past year appears to be the new full employment normal given the aging of the working population and slowing population gains.
In summary, while job growth slowed during the month and for the full-year, the labor market continues to appear solid. The bifurcation of the economy, however, continues with strength exhibited in the services sector which continues to add jobs in the 140,000-190,000 range, while manufacturing continues to struggle in adding any net jobs (goods producing jobs declined by 1,000 during December). That being said, the services sector had been adding jobs in the 184,000-193,000 range over the three months prior to December so the dip to 140,000 last month may represent an early sign that softness in manufacturing may finally be impacting the services sector; or, it could just be a one-month blip. In any event it’s something to keep an eye on.
YoY Wage Gains Continue to Slow
With the Fed in pause mode, and likely to stay there well into 2020, wages and labor gain momentum will be an early tell on when the Fed may move off the pause button in either direction. While today’s report certainly buttresses the case for continued pausing, the dip in YoY wage gains will go on the radar for future rate decisions in 2020. If monthly job gains continue to moderate (especially the services sector), and YoY wage gains fail to turn higher, the Fed will be back in easing mode, especially if inflation remains docile, as expected. For now, those conditions don’t exist but expect the Fed to be aware of and watchful over wages and service-sector job growth as we move through 2020.
|Treasury Curve||Today||Chg Last Wk.||LIBOR Rates||Today||Chg Last Wk.||FF/Prime||Rate||Swap Rates||Rate|
|3 Month||1.53%||+0.01%||1 Mo LIBOR||1.68%||-0.02%||FF Target Rate||1.50%-1.75%||3 Year||1.642%|
|6 Month||1.54%||-0.02%||3 Mo LIBOR||1.83%||-0.05%||Prime Rate||4.75%||5 Year||1.641%|
|2 Year||1.57%||+0.04%||6 Mo LIBOR||1.87%||-0.02%||IOER||1.55%||10 Year||1.786%|
|10 Year||1.84%||+0.05%||12 MO LIBOR||1.95%||-0.01%||SOFR||1.55%|